By Twinleaf Management The Twinleaf Small Cap Value portfolio continues a period of modest underperformance versus our most relevant benchmark, the Russell 2000 Index (RUT). There is more pronounced underperformance versus larger stock indexes such as the S&P 500 Index (SPX). In my opinion, a sense of investor indifference seems to have permeated the universe of small-caps, as well as telecom, media and technology stocks. There are many small caps trading near 52-week lows. Yet, counterintuitively, this may actually be an opportune time for long-term investors to invest a small percentage of their investable assets. In my opinion, the stocks of many small cap companies have become unreasonably inexpensive. And to the extent that anyone has earnings expectations for these companies — most of our companies are not widely followed by Wall Street — they are low. For example, two of our companies in the portfolio trade at valuations only slightly above balance sheet cash. That means, in these two cases, that investors receive the businesses themselves almost for free. This phenomenon doesn’t happen very often and isn’t likely to persist unless, of course, the businesses themselves are of poor quality and incapable of generating much cash. I don't believe that to be the case here. Further, a core investment criteria of ours, owning companies that become the target of merger and acquisition activity, hasn’t worked yet. This is especially frustrating in a year of elevated M&A activity but we do not believe that it will continue indefinitely either. I have recently been involved in some corporate “agitating,” or the process of publicly advocating the sale of a company by taking our case to the media. On June 24, the Los Angeles Times ran a piece on Crown Media (CRWN) in which we were mentioned and the following week the cable industry trade press carried a harder hitting article that more effectively questioned the wisdom of Crown’s independence in a rapidly consolidating media industry. Going public isn’t always advisable but the Crown situation is unique given the company’s 90% ownership by a recalcitrant shareholder, Hallmark Cards. We routinely raise the issue of consolidation with other companies more privately. This is certainly a frustrating period to be a small cap investor but some improved investor sentiment and some M&A activity could be a welcome antidote.
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